From the last FED statement:
However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
The inflation numbers have born out this possibility.
The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in November, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The November level of 201.5 (1982-84=100) was 2.0 percent higher than in November 2005.
The all items number decreased .5% in September and October, right when the Fed started using the above referenced statement.
I will admit I was incredibly skeptical of Bernanke's statements and predictions. However the record thus far is undeniable.
7 comments:
The question is what drives inflation these days?
During the bad old Carter/Nixon days inflation was blamed on labor (notwithstanding that labor wage demands lagged price increases).
Even rabid business types can't blame labor these days (although they are still going after unionized government workers).
So, it seems that most price pressure comes from the cost of raw materials. Key items like steel and copper are showing the results of growing Chinese demand. Won't the new OPEC quotas cause a rise in oil prices and a consequent rise in inflation?
Is Bernake doing something or just riding a favorable wave?
Right now Bernanke is just plain lucky. Oil dropped starting in late August or early September.
I think the question about oil is will the OPEC production quotas be enforced and effective?
It's certainly in their interests to enforce it as if the dollar bears are right the oil producing nations will be major bagholders.
“I sincerely believe that banking institutions are more dangerous to our liberties than standing armies. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.”---Thomas Jefferson
“Controlling our currency receiving our public moneys, and holding thousands of our citizens in dependence… would be more formidable and dangerous than a military power of the enemy.
If {government} would confine itself to equal protection, and, as Heaven does its rains, shower its favor alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles”---Andrew Jackson
Of course, translating directly from wage-inflation to cost-inflation without deducting productivity gains is tantamount to demanding that ownership unions (corporations) gain the bulk of gains from productivity increases.
Naturally, inflation of imported material and energy costs in proportion to value of goods and service produced must be subtracted from productivity gains first, because they represent a decline in national real income.
However, the thing about commodities other than energy sources is that they are not a large part of final value for big chunks of the economy.
And with a slowing construction industry, the big sector most sensitive to material costs is a declining share of total GDP.
Bruce:
If raw materials are not causing inflation what is?
I only see inflation (that is prices rising without any increase in the utility or value of the item) in two areas: real estate and stocks.
My house would sell for ten times what I paid for it 30 years ago. The neighborhood is about the same, the population of the region is stable, so the scarcity of the commodity can't be the reason.
Similarly stock prices have risen much faster than warranted by the performance of the firms. Most have gotten bigger, not better, mostly through mergers.
To me it looks like a pair of bubbles. I don't even think stocks are considered in calculating the cost of living. Shouldn't they be?
robertdfeinman said... Bruce:
If raw materials are not causing inflation what is?
I only see inflation (that is prices rising without any increase in the utility or value of the item) in two areas: real estate and stocks.
Given that I have started on the Post Keynesian approach to inflation, I may as well go whole hog. ...
... As long as some industries are near their capacity, there will be price inflation in those industries, and that will spill over into the economy as a whole. But that is just the normal 2%-3% that keeps us safely away from deflation, given that the economic cost of 0.5% deflation is much more severe than the economic cost of 3% inflation.
We are not anywhere near the rates of inflation to cause worries of an inflationary-spiral. But in the present Conventional Wisdom among central bankers, a 1% risks of sparking an inflationary spiral is worth a 100% risk of stagnant labor markets. Running the economy in second gear seems to be fine for modern central bankers, or even first gear. As long as the economy is not sliding backwards, the tachometer has to be kept closer to 0 than to the redline, for that extra margin of safety.
In US GDP, the biggest area of inflation at the moment is health care services. That is a perfect example of demand-driven inflation in an industry ... the US spends more public funds on health care as basically any other Western nation, and then add on top of that the fact that more than a third of the total is privately financed spending. The most recent international comparison I saw indicated that a majority of the increase in GDP going to health care is price inflation, and a minority it increase in health care services.
Normally when we talk about inflation, we are talking about price inflation of newly produced goods and services. Stocks are not produced goods or services, they are financial assets, so they are not included.
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